Sky results: “Watch the financials, not subs/churn”

July 28th sees Sky unveil its Q4 and full year results (to June 30th) and equity analysts at Deutsche Bank suggest that investors should not be obsessed with the usual key performance indicators (subs, churn, and such like) and instead focus on Sky’s core financials.

Analyst Laurie Davison warns that Sky will suffer rising UK churn and even a falling ARPU but these are “relic metrics” he says. “Growth has shifted from TV subs to triple play and is now coming across transaction revenues (video-on-demand, incremental NOWTV customers), advertising (AdSmart), mobility (Sky Go Extra, SkyQ) and mobile. Relic KPIs, especially ARPU and net adds, do not capture these and require contorted (and largely erroneous) efforts to relate to historical trends when the business was different. No one seeks to analyse quad play leaders like Comcast on such partial metrics.”

“We are not saying KPIs don’t matter, merely they are only a partial reflection of the business now; financials matter more. ARPU is being diluted by NOWTV subs and standalone BB subs and do not capture transactional, ad, mobility revs. Net TV adds exclude NOWTV Sports and similarly do not reflect selling more to the same (not the old model of selling the same to more).”

Drilling down into the 3 key Sky markets, Davison says the UK should show 5.4 per cent growth for Q4 and remains a “business that is accelerating, not slowing”. He adds that Sky Deutschland is no longer falling with the ending of the “failed” 2-yrea subscription now being phased out. Anticipated synergies from the Sky Europe operation should kick in from 2017 for Sky Italia.

As to those key performance indicators, Deutsche Bank is expecting Q4 churn in the UK to be 11.1 to 11.2 per cent, and that Q4 pay-TV net additions to be about 51,000, with ARPU at £565. For Sky Germany, Q4 churn to be 7.4 per cent, net additions to be 63,000 and ARPU €35/month. Sky Italia’s Q4 churn to be 15.1 per cent, net additions to be just 6,000 and ARPU at €42.

Deutsche Bank rates Sky as a “BUY” and with a target price of £1425 (currently about £899).